The Wet Seal brand is out to get back on track with fashion-conscious young females.
The comeback bid will play out under The Wet Seal LLC, the name of the new entity formed when the retail chain emerged from bankruptcy a few weeks ago.
The newly private operation has a few key building blocks on its side—financial backing from its new owner, a pared-down lineup of 173 stores, and a management team of industry and company veterans.
The investor and retail and fashion professionals have gathered around a restructuring plan crafted by Chief Executive Ed Thomas, who returned to the company as it looked set to fall into crisis last September. The comeback blueprint looks like a pragmatic antidote to numerous strategic zigzags that appeared to put the 53-year-old chain on the brink of irrelevance before Thomas returned last year.
The operation’s status as a limited liability company is new. Its predecessor, The Wet Seal Inc., was a publicly traded company that had been struggling financially for several years and in January filed for Chapter 11 bankruptcy protection. The proceedings involved an auction that led Wet Seal Inc. to sell its assets to Mador Lending LLC, an affiliate of Philadelphia-based private equity firm Versa Capital Management LLC. Versa in turn created the LLC and kept the brand name for operations.
Thomas is in his third stint as an executive with Wet Seal, with a total of more than 12 years working for the brand. He said the new company’s “go-forward” plan aims to supplement its slimmer enterprise—its store count is less than a third of its peak—by growing its e-commerce business. Underpinning brick-and-mortar and digital sales will be a return of Wet Seal’s fashion focus to the “18-to-24-year-old customers”—a group the company had steered away from in recent years.
Wet Seal now has about 2,000 employees spread over stores in 42 states, with another 140 or so staffers at its headquarters.
Thomas
Thomas might be the most familiar of any of them. He was president and chief operating officer of Wet Seal from 1992 to 2000, serving as a trusted aide to Kathy Bronstein, a driving force behind the company’s growth from a small, regional chain with 14 stores to more than 600 locations and with a reputation for knowing its customer.
Bronstein parted ways with Wet Seal in 2003, and Thomas came back in 2007 and served as chief executive until 2011. The chain went through two top executives in the few years before his recent return.
“Coming back in September, it was obvious the company was struggling—a major struggle,” Thomas said.
Shares in the company, which were traded on the Nasdaq exchange at the time, had dipped by more than 70% to under $1 over the months prior to Thomas’ return. He had seen them as high as $45 apiece in the late 1990s.
The company lost money in each of the past three years, most recently logging a $5.4 million loss on $5.4 million in revenue for the year through January.
Thomas took some immediate steps as the chain came to the conclusion that a recent strategic shift—a move toward plus-size and outlet stores—wasn’t working. Those, save a few outlet stores that were performing well, were among the first to go when Wet Seal decided to close more than 300 of its stores ahead of filing for bankruptcy in January.
“Then we kept a selection of stores that we felt had the best potential for growth in a turnaround situation,” Thomas said. “It was not easy closing that many stores [and seeing] the reduction in workforce. But we’re out of bankruptcy. I think we’re one of the few, especially in apparel, to go into bankruptcy and come out. And we did it in three months. … I think we did a pretty good job of putting a plan together that was financeable, believable. One of the biggest mistakes that retailers make in filing for bankruptcy is that they don’t close enough stores on day one, thinking that, ‘OK, we got the merchandise right; we can make it better.’ I just came in with the mindset that if we’re going to be forced into a filing situation, which we obviously tried to avoid, we should take [operations] down to a level that is financeable.”
It helped that Wet Seal had completed the store closures and had secured a plan sponsor, B. Riley Financial Inc., before filing for bankruptcy. Versa beat out B. Riley in a March auction to acquire Wet Seal’s assets.
Versa paid $7.5 million in cash for unsecured creditors, as well as a $625,000 breakup fee to B. Riley. It also took over from B. Riley $20 million in bankruptcy financing commitment.
“Part of the asset-purchase agreement with Versa … was that we would have exit financing,” said Wet Seal Chief Financial Officer Tom Hillebrandt, referring to a $15 million credit facility the company got from Crystal Financial LLC, a Boston-based lender. The money is expected to be used for working capital and is “good enough … for our needs right now,” Hillebrandt said.
Don’t expect Wet Seal to have any big expenditures in the near term.
“There’s no big spending plans,” Thomas said. “There will be some investments in e-commerce and information technology, but most of the concentration is just going to be running the 173 stores, getting the merchandise right, getting the company to a positive cash flow. As we get further down the road and start to see consistent improvement in our business, then we’ll come out with a more comprehensive, definitive plans.”
Chief Digital Officer
Thomas added that a major part of the company’s strategy is to boost its online business, which he initiated in 2009 and saw to its peak in 2010. Thomas last October—just after he returned to the company—brought back Jon Kubo, who previously served as chief information officer and left after Thomas did.
“I brought him back as chief digital officer,” Thomas said. “He was instrumental in the growth of the dot-com business during my last time here. … You’ll see us invest more time, effort and money to the dot-com business. It is definitely short term as opposed to opening more stores. There is no immediate plan to open more stores, but obviously once we get through the turnaround, it’ll be a combination strategy of starting to grow the chain again with physical stores and the dot-com side.”
Another change Wet Seal is going for is to “adjust the merchandise mix” to better target the high-teens and early-20s crowd, Thomas said.
Chief Merchandising Officer Christine Lee has been taking the lead on that measure. She joined Wet Seal in September after a stint at Pacific Sunwear of California Inc. and about 18 years with Urban Outfitters Inc.
“You will see us add a few brands to the merchandise mix, brands you wouldn’t see in other retailers but certainly recognizable,” Thomas said. “We’re working on that now. It’s to just add an element of differentiation from the other fast-fashion players out there. That’s definitely one of the strategies out there.”
Meanwhile, the old Wet Seal has changed its name to Seal123 Inc. and has become “nothing but a shell that still is in bankruptcy and needs to be wound down and liquidated,” Hillebrandt said.
All the bankruptcy-related issues aren’t a concern for Wet Seal LLC, he said.
Former Tilly’s Inc. Chief Financial Officer Bill Langsdorf, who has been serving Wet Seal as a senior adviser since November, took the role of winding down the bankrupt entity.
“We need to have somebody in all those roles of CEO and CFO and secretary, etc.” for legal procedural purposes, Hillebrandt said. “So Bill is going to do that. Ed and I and the rest of the company have come to the LLC to run the company.”
‘Opportunity’
Thomas said he’s looking forward to growing the company back to health, especially with a void in the fast-fashion segment of retail, where many businesses have struggled to compete while Los Angeles-based Forever 21 has grown into a powerhouse and drawn H&M from Sweden as a rival.
“Over just a few months, over 1,800 stores have closed in this segment,” Thomas said, referring to various companies that have filed in bankruptcy court, including Simply Fashion Stores Ltd. and Cache. “That’s a major opportunity to pick up market share. It will take a lot, but there’s definitely an opportunity.”
Mostly, though, it’ll be up to the people.
“Our team did an excellent job of execution during this time,” he said. “I’m proud of what the team did, and I’m really confident of what this team can do going forward in a more normal environment. I think we are realistic in knowing that the company is not totally fixed. And we definitely lost some people during the transition, but not as many as you think. I know people that stuck around are going to be rewarded for it. We are certainly back in recruiting mode.”
